The business activities of the KION Group necessarily involve risk. Dealing responsibly with risk and managing it in a comprehensive manner is an important element of corporate management. The overarching aim is to fully harness business opportunities while ensuring that risk always remains under control. Using a groupwide risk management system, the KION Group contains all identified risks by implementing suitable measures and takes appropriate precautions.
This ensures that the losses expected if these risks arise will be largely covered in a timely manner and therefore will not jeopardize the Company’s continuation as a going concern. Risk management is embedded in the Corporate Controlling function and plays an active and wide-ranging role, supported by the strategic focus of Corporate Controlling. The Operating Units’ business models, strategies, and specific plans of action are evaluated systematically. This ensures that risk management is integrated into the KION Group’s overall planning and reporting process.
Principles of risk management
Risk management system
Under its KION 2027 strategy, the KION Group is consciously taking on a limited amount of risk in order to achieve its business objectives. In doing so, it follows a well-balanced risk strategy that is conditional upon it always being able to secure external funding. All management decisions take the risk perspective into consideration. Comprehensive risk management ensures a clear view of the value at risk, the probability of occurrence, and countermeasures at the different levels of the organization.
Having a groupwide risk-bearing capacity plan requires the Group to define a level of risk appetite that is appropriate to its strategy. Risk-bearing capacity is defined as the maximum risk that can be sustained, while strictly avoiding any risks to the Group’s survival as a going concern. In combination with the risk strategy, risk-bearing capacity provides the framework for the risk appetite of the Operating Units in respect of the different risk types. It is calculated as the ratio of adjusted EBITDA on an annualized basis to the simulated risk position. Monte Carlo simulation was introduced in 2022 in order to calculate the simulated risk position. At the level of the KION Group, risk appetite is defined as the aggregate risk across the individual risk types that will be tolerated in order to achieve the strategic objectives and medium-term planning. Risk appetite and the groupwide risk-bearing capacity plan are therefore key elements of the risk strategy.
The procedures governing the KION Group’s risk management activities are laid down in internal risk guidelines. For certain types of risk, such as financial risk, risks arising from the lease business, and compliance risk, the relevant departments also have guidelines that are specifically geared to these matters and describe how to deal with inherent risks. Risk management is organized in such a way that it directly reflects the structure of the Group itself. Consequently, risk officers and their subordinate risk managers have been appointed for each company. These risk roles are also established at the level of Operating Units. A central Group risk manager is responsible for the implementation of risk management processes in line with procedures throughout the Group. His or her remit includes the definition and implementation of standards to ensure that risks are captured and evaluated. He or she is also responsible for the Group’s internal reporting to KION GROUP AG’s Executive Board and Supervisory Board.
Like the organizational structure, the risk management process is also generally organized on a decentralized basis. Firstly, a groupwide risk catalog is used to capture the risks attaching to each company. Each risk must be captured individually. If the losses caused by a specific risk and the likelihood of this risk occurring exceed defined limits, KION GROUP AG’s Executive Board and the KION Group’s Corporate Controlling function are notified immediately. Each risk is documented in a reporting system designed specifically for the requirements of risk management. Risks affecting more than one Group company, such as market risks and competition risks, are not recorded individually but are instead evaluated at Group level.
The scope of consolidation for risk management purposes is the same as the scope of consolidation for the consolidated financial statements. The risks reported by the individual companies are combined to form Operating Unit risk reports as part of a rigorous reporting process. To this end, minuted risk management meetings are held once a quarter. Moreover, material risks are discussed with the Operating Units at the business review meetings. Following this discussion, the Operating Unit risk reports are then used to compile an aggregate risk portfolio for the KION Group as a whole. To support this, the relevant departments of KION GROUP AG are consulted each quarter in order to identify and assess risk – particularly Company-wide risk – affecting areas such as corporate finance, procurement, legal, compliance, tax, human resources, and the lease business. The KION GROUP AG Executive Board and the Audit Committee of the Supervisory Board of KION GROUP AG are informed of the Group’s risk position once a quarter. The Internal Audit department audits the risk management system at regular intervals.
Internal control system
The KION Group’s internal control system, which is geared toward the specific needs of the Company, covers the entirety of the systematically defined controls and monitoring activities that are designed to ensure the efficiency of the Company’s business operations, the reliability of its financial reporting, and compliance with key legal provisions and internal policies. These control processes also include the Company’s strategic planning, where the underlying assumptions and plans are reviewed on an ongoing basis and refined as necessary.
The internal control system covers all fully consolidated subsidiaries of the KION Group. The scope of the control activities to be carried out is dependent on the specific risks and the materiality of the respective subsidiary for the consolidated financial statements of KION GROUP AG.
An effective and efficient internal control system is key to successfully managing risks in business processes. The Internal Audit department evaluates governance, risk management, and the control processes by following a systematic and structured process, thus helping to bring about improvements. It focuses primarily on the following aspects:
- appropriateness and effectiveness of the internal control systems for avoiding financial losses
- compliance with legal requirements, directives from the Executive Board, other policies, and internal instructions
- correct performance of tasks and compliance with business principles
Please refer to the information provided in the corporate governance statement for an assessment of the appropriateness and effectiveness of the risk management system and internal control system.
Material features of the internal control and risk management system pertaining to the (Group) accounting process
The main objectives of the accounting-related internal control system are to avoid the risk of material misstatements in financial reporting, to identify material mismeasurement, and to ensure compliance with the applicable regulations and internal instructions. This includes verifying that the consolidated and separate financial statements and the combined management report comply with the relevant accounting standards.
For its (Group) accounting process, the KION Group has defined suitable structures and processes within its internal control and risk management system and implemented them in the organization.
Changes to the law, accounting standards, and other pronouncements are continually analyzed with regard to their relevance and effect on the consolidated financial statements and group management report; the relevant changes are then incorporated into the Group’s internal policies and systems.
All consolidated entities must follow the KION Group IFRS Accounting Manual when preparing their IFRS reporting packages. This manual contains the recognition, measurement, and disclosure rules to be applied in the KION Group’s accounting in accordance with IFRS. The accounting guidelines primarily explain the financial reporting principles specific to the KION Group’s business.
The accounting-based internal control and risk management system includes defined control mechanisms, automated and manual reconciliation processes, separation of functions, the double-checking principle, and adherence to policies and instructions.
The employees involved in the (Group) accounting process receive regular training in this field. Throughout the accounting process, the local companies are supported by central points of contact. The consolidated accounts are drawn up centrally using data from the consolidated subsidiaries. Specially trained KION Group employees carry out the consolidation activities, reconciliations, and monitoring of the stipulated deadlines and processes. A team is responsible for monitoring the system-based controls, which it supplements with manual checks. Employees with the necessary expertise provide support on specialist questions and complex issues.
Internal control mechanisms and ongoing analysis of the regulatory framework enable any risks that might jeopardize the compliance of the consolidated financial statements and group management report with accounting standards to be identified as soon as possible so that appropriate countermeasures can be taken. Such risks form part of the KION Group’s aggregate risk profile and are classified as operational risk.
The fundamental shift in the geopolitical situation resulting from the war in Ukraine has increased economic risk. Particularly in the EMEA region, the main sales region for the KION Group, the shortages and increased price of energy commodities may trigger a recession that would affect the Company’s key customer industries. There is also the risk of further inflation following the sharp price rises seen in 2022 and of a potential destabilization of the international financial markets if interest rates rise and a debt crisis unfolds in emerging markets and developing countries.
The war in Ukraine, meanwhile, has exacerbated the already severe disruption to supply chains and this has led to an increase in procurement risk for the KION Group. Despite an easing of the strict coronavirus restrictions in China, the situation remains uncertain, meaning that production delays or stoppages could result in an even more limited availability of parts and materials, and potentially also push up the cost of materials, energy, and logistics. The countermeasures initiated in 2022 on the supplier side, including the optimization of internal processes, are helping to contain procurement risk. The risk matrix below showing the relevant probabilities of occurrence and levels of risk from the Group’s perspective remained unchanged compared with the end of 2021. The risk level for procurement risk was lowered to medium, having been high in the Q2 2022 interim report; the probability of occurrence remained unchanged.
Overall, the risk situation continues to be regarded as moderate. This means that the limits specified in the risk-bearing capacity plan are not expected to be exceeded. As things stand at present, there are no indications of any individual or aggregated risks that could jeopardize the Company’s continuation as a going concern.
While the risk report examines possible negative influences and variances from the scenario on which the outlook is based, potential positive influences are described in the opportunity report. At the time that this combined management report was prepared, all known risks were reflected in the outlook for 2023.
The market risks and competition risks described, the risks along the value chain, the human resources risks, and the legal risks largely relate to the Industrial Trucks & Services and Supply Chain Solutions segments. Risks arising from the lease business mainly affect the Industrial Trucks & Services segment, while project risks primarily relate to the Supply Chain Solutions segment. Financial risks resulting from the Company’s general funding situation would predominantly impact on the Corporate Services segment.
The KION Group also continuously identifies, assesses, and mitigates sustainability-related risks. Any of these risks that have a measurable financial impact are incorporated into an existing risk category as appropriate.
Market risks and competition risks
Market risk can arise when the economy as a whole or the relevant sector does not perform as well as had been anticipated in the outlook. In the Industrial Trucks & Services segment, the outlook for 2023 with regard to new business assumes a noticeable decline in order intake, which due to the high level of orders on hand should have only a moderate impact on the anticipated level of revenue. In the Supply Chain Solutions segment, the KION Group is expecting a lull in investment in warehouse automation. The problems with the supply of materials and components that are persisting across various sectors worldwide may have an adverse impact on the material handling market. However, the KION Group believes that the probability of occurrence for such risk and the level of risk will remain unchanged in 2023 compared with the prior year.
Cyclical fluctuations in macroeconomic activity affect both the market for industrial trucks and the market for supply chain solutions, although the latter generally has greater immunity to economic cycles. Customers’ decisions on whether to invest depend to a large degree on the macroeconomic situation and conditions in their particular sector. In the event of heightened economic uncertainty or an economic downturn, including as a result of external shocks such as a global pandemic, customers tend to postpone their capital expenditure plans. Although demand for services is less cyclical than new business with industrial trucks, it correlates with the degree of utilization of the trucks and systems, which usually declines during difficult economic periods.
As the KION Group can only adjust its fixed costs to fluctuations in demand to a limited extent, reductions in revenue impact on earnings. Despite the importance of the North American business in the Supply Chain Solutions segment and the prospective growth of business in China, the bulk of revenue continues to be generated in Europe. As a result, the market conditions that prevail in Europe impact significantly on the KION Group’s financial performance.
The KION Group’s modeling of the market is based on a further slowdown in global economic growth and a recession in Europe, as explained in the outlook. In addition, there are significant sources of risk that could have an adverse impact on the market environment and, as a result, on the KION Group’s business. These include a potential worsening of the supply chain problems, unexpected price increases, and financial market risks, for example in the form of higher risk premiums for emerging markets, making it more difficult to finance capital expenditure.
Risks in connection with trade disputes and geopolitical conflicts and tensions may also hinder some aspects of the global economy’s recovery. As well as the war in Ukraine, the focus here is on a potential escalation in the trade dispute between the US and China. In the medium term, new barriers to trade could significantly hamper production and lead to renewed disruption to global supply chains.
All these factors could have a negative impact on customers’ willingness to invest and thus on demand for the KION Group’s products and result in a further deterioration of the already muted market outlook. However, it is not currently foreseeable whether such market risks will become relevant and then have a material effect on the business situation and financial performance.
Developments in the various sources of risk, including any knock-on effects, and the geopolitical situation are monitored closely. Measures have been taken in both operating segments to help contain the earnings risk arising from reductions in revenue as a result of economic conditions. Diversification of the customer base in terms of industry and region and the expansion of service activities also play a role in mitigating risk.
Moreover, the KION Group closely monitors the market and its competitors so that it can identify market risks at an early stage and adjust its production capacities in good time. Besides global economic growth and other data, the KION Group also analyzes exchange rates, price stability, the consumer and investment climate, foreign trade activity, and political stability in its key sales markets, constantly monitoring the possible impact on its financial performance and financial position.
The KION Group mitigates such strategic risks by, for example, carrying out in-depth market research, conducting thorough evaluation procedures to assess political and economic conditions, and structuring contracts appropriately.
Competition risk describes the risk that growing competitive pressure will prevent the KION Group from achieving its predicted margins and market share. The markets in which the KION Group operates are characterized by strong competition, often price-driven. Price competition is compounded by some manufacturers having cost advantages, sometimes due to the currency situation and sometimes because local labor costs are lower. This mainly affects the Industrial Trucks & Services segment, where competition is fierce, particularly in the economy and volume price segments. On the other hand, the wide range of product variants made possible by efficient modular concepts, along with rapid and reliable access to services, creates a competitive advantage for the KION Group. This is especially the case in the volume and premium segments.
Building on their local competitive strength, rivals in emerging markets are also seeking opportunities for expansion in regions outside their local markets, particularly in the Industrial Trucks & Services segment. Competition has continued to increase, especially from manufacturers in China, which can be seen from the changes in the competitive situation last year. The fact that customers in developed markets have sophisticated service needs and high expectations in terms of quality still presents a barrier to growth for some of these manufacturers, but the bar is getting lower. Competitive pressures are likely to continue to intensify in the future.
It is also conceivable that competitors will join forces and their resulting stronger position will be detrimental to the KION Group’s sales opportunities. Moreover, predictions of higher volumes and margins may lead to overcapacity, which would put increased pressure on prices. Although the excellent customer benefits provided by its products and services have enabled the KION Group to charge appropriate prices until now, it is taking a variety of steps to contain competition risk. Alliances, partnerships, acquisitions, and other measures are increasingly playing a role in improving the KION Group’s competitiveness in terms of resources, market access, and technology. One of the risks of such partnerships and acquisitions is that the expected benefits will materialize only partly or not at all. For example, the organizational integration of acquired companies may actually harm the Group’s financial performance. It is also possible that a partner will collaborate with competitors if exclusivity agreements are not in place. The steps that the KION Group is taking to mitigate its competition risk also include improving its cost position and securing low-cost, stable sources of supply.
The KION Group also continually evaluates its options for strengthening and consolidating its market position, in particular through the strategic construction and expansion of production facilities and through an integrated offering across the two operating segments. Overall, competition risks for 2023 continue to be regarded as having a medium to high probability of occurrence, while the level of risk is considered to be low.
Risks along the value chain
Research and development (R&D) risks
The KION Group’s market success and business performance depend to a large extent on its ability to tailor its portfolio to the specific needs of the various industries in which its customers operate. Key to this is the integration of the hardware (industrial trucks and automation solutions), software (from control center to vehicle control), and services (from repair to financing) into a single offering. The Group therefore needs to continually develop products that meet customer expectations and comply with changing regulatory and technological requirements. To this end, the KION Group must anticipate customers’ needs and changing market conditions and has to quickly bring new products to market. If the Company fails to do this, its technological and competitive position could be compromised in the long term.
The innovations developed by the KION Group are comprehensively protected by intellectual property rights, in particular patents. Nevertheless, there is always the possibility that products or product components will be imitated. There is also a risk that patent applications will not be successful. The KION Group mitigates research and development risks by focusing firmly on customer benefit in its development of products and solutions. Customer needs are incorporated into the development process on an ongoing basis by ensuring close collaboration between sales and development units and taking account of all region-specific requirements. Potential research and development risks are also reduced by carefully managing projects and processes.
Procurement activities constitute a potential risk for the KION Group in terms of the general availability of parts and components and the rising cost of raw materials, inputs and intermediate products, logistics services, and energy.
The rises in the cost of materials, energy, and logistics, from an already high level, increased procurement risk for the KION Group in the reporting year. In 2022, the proportion of cost of materials for new trucks in the Industrial Trucks & Services segment directly influenced by changes in commodity prices increased. Moreover, conditions in the commodity markets typically affect component prices after a delay of three to six months.
Disrupted supply chains and the resulting reduction in the availability of parts and materials is being further exacerbated by the ongoing war in Ukraine. Uncertainty related to coronavirus, particularly in China, could also lead to further risks on the procurement side. Bottlenecks in suppliers’ capacity could lead to backlogs in the supply of further raw materials and components to the KION Group at any time. The KION Group obtains some of its key components from a limited number of core suppliers. Key components in the Industrial Trucks & Services segment include internal combustion engines, tires, and high-performance forged and electronic parts. The resulting backlogs and shortages can lead to temporary decreases in revenue and liquidity as well as to inefficiencies in production.
It is very difficult to make predictions about how 2023 will unfold. However, countermeasures have been initiated at an early stage in order to mitigate problems with suppliers and in respect of sales to customers. For example, the supplier base has been diversified to an even greater extent in order to mitigate disruption in the supply chains and suppliers are being closely monitored in the context of a global procurement function. In addition, dedicated project teams are continually monitoring supply chains, the availability of materials, and suppliers’ ability to fulfill orders. For critical materials, the KION Group has also increased its buffer of inventories.
Furthermore, the continued sharp rise in material, energy, and logistics costs is being passed on to customers – wherever possible and taking into account the competitive situation – through specially structured contracts that allow for appropriate increases in list prices, reflecting the prevailing market situation in each case.
Overall, the prevailing procurement situation is unchanged compared with previous year. The risk level for procurement risk was lowered to medium, having been high in the Q2 2022 interim report; the probability of occurrence remained unchanged.
Production risks are largely caused by quality problems, possible disruptions to operational procedures, or production downtime at individual sites. They can also materialize as secondary risks resulting from the aforementioned procurement risks. The risk level in respect of business process disruptions and production outages at individual sites, which had temporarily increased as a result of the coronavirus pandemic, is viewed as moderate for 2023, with a low probability of occurrence for such risk. In view of the vaccination rate now achieved and the comprehensive hygiene and contact tracing measures put in place, significant chains of infection within the workforce continue to be seen as fairly unlikely. Once again, no production departments or entire sites needed to be closed in the reporting year.
The KION Group’s closely integrated manufacturing network presents a heightened risk to its ability to deliver goods on time. There is also a risk that structural measures and reorganization projects will not be implemented owing to ramp-up difficulties, disruption of production, or strikes. Delays in delivery or a rise in the number of complaints could harm the KION Group’s standing with its customers and, as a result, could harm its financial situation.
Contractual provisions and comprehensive project management are important elements of reorganization projects because they help to minimize this risk. The KION Group also carries out preventive maintenance, implements fire protection measures, and trains its staff. The Company has taken out a commercially appropriate level of insurance to limit the risk of potential losses. Quality assurance is a high priority throughout the value chain and reduces possible quality-related risks arising from the products and services provided. The KION Group mitigates its quality-related risks significantly by applying rigorous quality standards to its development activities, conducting stringent controls throughout the process chain, and maintaining close contact with customers and suppliers.
Risks arising from customer project business
In the customer project business of the Supply Chain Solutions segment, risks can arise from deviations from the schedule originally agreed with the customer, potentially leading to an increase in project costs, to revenue and profit being recognized in subsequent years or, in isolated cases, to the imposition of contractual penalties. Another possible risk is that the technology deviates from the promised specifications, which may result in additional completion costs and contractual penalties. This is influenced by the customized development of sometimes innovative technologies at customer sites, which can increase the risk of technology failures and contractual penalties having to be paid as a result. The scope and complexity of individual projects can lead to unexpected cost increases over the term of the project that were not anticipated in the project costing and cannot be (or cannot be fully) passed on to the customer.
The wide-ranging measures that were taken in response to the unsatisfactory earnings performance in 2022, such as improvements to internal processes in project delivery and project management and the inclusion of price adjustment clauses in customer contracts, will help to mitigate risk in 2023. Project-specific risk management is also carried out. This involves detailed evaluation of the risks when defining the technical aspects of quotations plus financial risk provisioning based on the individual project specifications when preparing quotations. A multi-stage approval process based on an extensive list of criteria ensures that technological, financial, country-specific, currency-specific, and contractual risks are mitigated to the greatest extent possible.
The potential risks that may arise in the project realization phase are monitored in every individual project using detailed continuous reviews based on the individual items of work that make up the project. This enables corrective measures to be taken at an early stage and thus keeps risks under control. In the customer project business, the aforementioned disruptions to the supply of components mainly manifest themselves in the form of isolated project delays and increased expenditure on project realization, but they can also affect procurement. Given that the situation with regard to product availability remains very difficult worldwide and affects multiple sectors, the KION Group expects the level of risks from the project business to remain at a moderate level in 2023. This is after factoring in the risk-mitigating effects of the measures that have been taken.
The main sales risks – besides a drop in demand caused by market conditions – result from dependence on individual customers and sectors. Despite the expected downturn in the macroeconomic environment, the risk that customers will cancel or postpone orders has not, in the assessment of the KION Group, significantly increased. Once again, there were no significant cancellations or problems resulting from other changes to orders in 2022. The risk level and probability of occurrence for sales risk are therefore both regarded as low for 2023, as was also the case in 2022. However, the KION Group is continuing to engage in dialog with its customers and is closely monitoring the geopolitical and market-related risks and their potential consequences.
Because of its customer project business, the Supply Chain Solutions segment generally has a greater dependence on individual sectors and individual customers than the Industrial Trucks & Services segment, which is not dependent on individual customers. The KION Group’s presence in various customer industries and segments helped to minimize the overall risk.
The concentration risk for the KION Group as a whole is therefore still considered to be low. The business is highly diversified from a regional perspective. In addition, the KION Group supplies companies of all sizes.
A high degree of interconnectedness internally between sites and externally with customers and other companies means that the KION Group also relies on its IT systems working flawlessly. The KION Group undertakes ongoing further development of a reliable, extendable, and flexible IT system environment with the aim of countering migration risk when updating software and any IT-related risks that may arise from the failure of IT systems and IT infrastructure. Internal IT resources are pooled in the cross-segment KION Group IT function, which has well-established processes for portfolio management and project planning and control. Independent external reviews are conducted to provide additional quality assurance. Various technical and organizational measures protect the data of the KION Group and the Group companies against unauthorized access, misuse, and loss. These measures include, in particular, measures to protect and defend against cyberattacks on IT systems of the KION Group. For example, procedures are in place to validate and log access to the Group’s infrastructure. The Company has also taken out a commercially appropriate level of insurance to limit the risk of potential losses.
Further IT risks exist in connection with potential breaches of data privacy laws, including in relation to the processing of personal data and the documentation of such processing. For example, serious breaches of the European General Data Protection Regulation (GDPR) can lead to fines of up to 4 percent of the previous year’s revenue. Given that the KION Group maintains consistently high compliance standards, the probability of data protection laws being breached continues to be regarded as very low. Events in 2022 gave no grounds to assume otherwise.
The main types of financial risk relating to corporate finance are liquidity risk, currency risk, interest-rate risk, and counterparty risk. Counterparty risk consists solely of credit risks attaching to financial institutions.
A risk management policy stipulates how to deal with the aforementioned risks. Risk arising out of the bond, lending, and promissory note conditions that have been agreed was not regarded as material as at December 31, 2022. It relates, for example, to the restrictions in respect of compliance with financial covenants and upper limits for certain transactions and in respect of the obligation to submit special regular reports. There is a particular risk of exceeding the agreed maximum level of leverage as at a specific reference date, which would give lenders a right of termination.
Some of the Group’s financing takes the form of variable-rate or fixed-rate financial liabilities. Interest-rate swaps are used to hedge the resultant interest-rate risk.
The Company generally refers to credit ratings to manage counterparty risk when depositing funds with a financial institution. The KION Group only uses derivatives to hedge underlying operational and financial transactions; they are not used for speculative purposes. It is exposed to currency risk because of the high proportion of its business conducted in currencies other than the euro. In the Industrial Trucks & Services segment, at least 75 percent of the currency risk related to the planned operating cash flows based on liquidity planning is normally hedged by currency forwards in accordance with the risk management policy. The Supply Chain Solutions segment hedges against currency risk on a project-by-project basis. Corporate Finance rigorously complies with and monitors the strict separation of functions between the front, middle, and back offices.
Each Group company’s liquidity planning is broken down by currency and incorporated into the KION Group’s financial planning and reporting process. Corporate Controlling checks the liquidity planning and uses it to determine the funding requirements of each company. The funding terms and conditions faced by the lenders themselves (manifested, for example, in the payment of liquidity premiums on interbank lending) may result in a future shortage of lines of credit and / or increased financing costs for companies. However, the Group currently does not expect any changes in its lines of credit or any excessive increases in margins.
The individual Group companies directly manage counterparty risks involving customers. Each individual Group company has established a credit management system for identifying customer-related counterparty risks at an early stage and initiating the necessary countermeasures.
Goodwill and brand names with an indefinite useful life represented 27.6 percent of total assets as at December 31, 2022 (December 31, 2021: 28.3 percent). Pursuant to IFRS, these assets are not amortized and their measurement depends, above all, on expectations about the future financial performance of the KION Group. If these future expectations are not fulfilled, there is a risk that impairment losses will have to be recognized on these assets.
Overall, the level of financial risk remaining unchanged compared with the previous year.
Risks arising from lease business
The lease activities of the Industrial Trucks & Services segment mean that the KION Group may be exposed to residual value risks from the marketing of trucks that are returned by the lessee at the end of a long-term lease and subsequently sold or re-rented. Residual values in the markets for used trucks are therefore constantly monitored and forecast. The KION Group regularly assesses its aggregate risk position arising from the lease business.
The risks identified are taken into account by the Company in the costing of new leases by recognizing write-downs or provisions and, if necessary, adjusting the residual values. Groupwide standards to ensure that residual values are calculated appropriately, combined with an IT system for residual-value risk management, reduce risk and provide the basis on which to create the transparency required.
The KION Group mitigates its liquidity risk and interest-rate risk attaching to the lease business by ensuring that most of its transactions and funding loans have matching maturities and by constantly updating its liquidity planning. Long-term leases are primarily arranged on a fixed-interest basis. If they are financed using variable-rate instruments, interest-rate derivatives are entered into in order to hedge the interest-rate risk, where it makes commercial sense to do so.
As a rule, the KION Group finances its lease business in the same currency as the lease with the end customer in order to exclude currency risks.
The counterparty risk inherent in the lease business continues to be insignificant. The Group also mitigates any losses from defaults by its receipt of the proceeds from the sale of repossessed industrial trucks. Furthermore, receivables management and credit risk management are refined on an ongoing basis.
Human resources risks and legal risks
The KION Group relies on having highly qualified skilled workers and managers in key roles. If they left, it could have a long-term adverse impact on the Group’s prospects. That is why the KION Group actively engages in HR work aimed at identifying and developing young professionals with high potential who already work for the Company and retaining them over the long term, thereby enabling succession planning for key roles across the Group. The KION Group also positions itself in the external market as an employer of choice. Firstly, this should enable it to make strategic additions to its portfolio of existing staff and, in this way, avert the risk of possibly losing expertise. Secondly, access to highly skilled workers helps to lay the foundations for future profitable growth.
Any efficiency enhancement measures, capacity adjustments, or restructuring necessary to secure the Company’s long-term competitiveness may result in a risk of strikes and reactions of other kinds by the workforce. The KION Group is committed to doing all it can to limit the negative impact on the workforce of such measures and, if job losses are necessary, taking steps to ensure they are achieved with the minimum possible social impact. At sites where codetermination arrangements provide for the workforce to be involved in decision-making, the KION Group engages in constructive talks on these matters with the employee representatives.
The legal risks arising from the KION Group’s business are typical of those faced by any company operating in this sector. The Group companies are a party in a number of pending lawsuits in various countries. The individual companies cannot assume with any degree of certainty that they will win any of the lawsuits or that the existing risk provision in the form of insurance or provisions will be sufficient in each individual case. However, the KION Group is not expecting any of these existing legal proceedings to have a material impact on its financial position or financial performance. These lawsuits relate, among other things, to liability risks, especially as a result of legal action brought by third parties because, for example, the Company’s products were allegedly faulty or the Company allegedly failed to comply with contractual obligations.
Further legal risk may arise as a result of the environmental restoration of decommissioned sites, for example because of work required due to contamination. Any damage to the environment may lead to legal disputes and give rise to reputational risk. There are also risks arising from the need to implement regulatory requirements intended to facilitate a circular economy and limit climate change. The level of these risks is regarded as low due to the KION Group’s business model and to the standards that have already been achieved in the areas of energy-related emissions, occupational health and safety, and supply chain monitoring.
The Company has taken measures to prevent it from incurring financial losses as a result of these risks. Although legal disputes with third parties have been insignificant both currently and in the past, the Company has a centralized reporting system to record and assist pending lawsuits. In addition to the high quality and safety standards applicable to all users of the Company’s products, with which it complies when it develops and manufactures the products, it has also taken out the usual types of insurance to cover any third-party claims. In addition, interdisciplinary teams work on the avoidance of risks arising from inadequate contractual arrangements. A further objective of this cooperation across functions is to ensure compliance with mandatory laws, regulations, and contractual arrangements at all times.
Owing to the KION Group’s export focus, legal risk and reputational risk arise due to the numerous international and local export controls that apply. The Company mitigates these risks with a variety of measures. Consequently, export controls are an important part of the compliance activities carried out by the Group companies.